One of the major financial considerations in the adulting journey is to purchase your first home. As houses are big ticket items, it is not uncommon to turn to debt to finance this asset. Heartland Boy purchased a BTO, which is a form of public housing back in 2014. In beginning 2019, as he collected the keys to his HDB flat, he was faced with the dilemma of choosing between a HDB housing loan or a bank loan. Eventually, Heartland Boy chose HDB loan over a bank loan. Here are the advantages of choosing a HDB loan over a bank loan.
1. No Early Repayment Penalty For HDB Loan
One of the attractiveness of a HDB housing loan lies in its flexibility. A HDB loan borrower will not be penalized for choosing to repay his HDB loan early while the same cannot be said for most bank loans. For example, if you were one of the 2 lucky winners of the 2019 Chinese New Year Toto Angbao Draw, you can easily choose to pay off your entire outstanding HDB mortgage with no prepayment penalty. More realistically, it is often the case that one may choose to use his or her year-end bonuses to make a partial capital repayment. An early partial principal repayment, which starts from a minimum of $5,000, may reduce your loan tenure from X years to (X-Y) years or leave you with a lower monthly instalment but with the same expiration date. Most importantly, you will not be required to pay the remaining outstanding interest committed initially (i.e. for the entire duration). The interest payable schedule will be based on the remaining HDB balance. Therefore, the incentive to make an early repayment is to save on the total interest expense paid on the housing mortgage. This incentive is viable because there is no early repayment penalty; which would have otherwise eaten into any potential interest expense savings.
2. HDB Loan Borrowers Still Can Switch To A Bank Loan
Another flexibility is that Heartland Boy will not be punished for changing his mind. If any of the banks lures him with an attractive offer, he can choose to refinance and take up a bank loan instead. Since a lock-in period for HDB loan is not applicable, the decision to switch can take place anytime and will not attract a penalty. However, the reverse is not true. A home owner who opted for a bank loan cannot change mind and switch to a HDB Loan during the mortgage period. In the eyes of the government, it is deemed that the home owner has already passed up on the chance to use a HDB concessionary loan. Ouch
3. HDB Loan Requires A Lower Downpayment
If a HDB home owner satisfies the criteria for the Staggered Downpayment Scheme, only a 10% downpayment is required if the home owner takes up a HDB loan. This means that the remaining 90% balance can be financed by a HDB loan, subject to the assessment outcome stated in the Home Loan Eligibility (HLE) Letter. This translates to a potential loan to value (LTV) of 90%. In addition, the entire 10% can be paid via Central Provident Fund Ordinary Account (‘CPF OA’), which means that cash can be used to fund renovation works and the purchase of furniture.
In comparison, the loan ceiling for a bank loan is only 75%, which effectively translates to a required downpayment of 25%. More importantly, one-fifth of the downpayment must be paid in cold hard cash. More details are shown in Table 1.
For couples with liquidity constraints, even a bank loan with lower interest rate may not offer the best solution to their cash needs. Exhausting all your cash for the downpayment may be not financially prudent as a pool of emergency funds should always be set aside. On the other hand, the higher LTV not only makes home ownership more accessible, it also enhances the flexibility of a HDB Loan further.
Heartland Boy’s Experience
As the title of this blog article suggests, Heartland Boy chose a HDB housing loan over a bank loan. He wanted to apply for the maximum loan tenure as he thinks that a housing loan is a cheap source of debt. He imagines himself doing better than the 2.6% interest rate with the spare liquidity lying around the household. Heartland Girl was rather apprehensive about this idea and wanted to clear the housing loan as fast as possible.
For the sake of his marriage, Heartland Boy used the online CPF Loan Calculator to try to find a middle ground. Eventually, he presented the proposal of a 14-year tenure (Heartland Boy’s lucky number is 4). The monthly mortgage instalments amounted to about 70% of their regular CPF OA contributions (both employer and employee’s). This is a relatively safe threshold as it allows their CPF OA to continue to accumulate as long as they remain employed on the existing salaries.
In addition, they opted for CPF to wipe out their entire Ordinary Accounts. This decision was made easier as they have already maximized the 1% bonus interest rate with funds from their CPF Special Account and MediSave Account. Therefore, all the funds in their OA were only earning 2.5% interest rate, and not 3.5%. Furthermore, they will save at least 30% of their CPF OA contributions per month based on the 14-year loan tenure that they have taken. Including their incoming year-end bonuses, there is sufficient buffer for them to quickly accumulate an emergency pool of funds inside their CPF OA once again.
Purchasing a house is a huge commitment and choosing how to finance it can often make or break the household finances. Therefore, the dilemma of HDB loan vs a bank loan should be given more thought and the decision taken very carefully. Likewise, if you are looking to mitigate the possibility of paying ABSD, you may consider having one of the applicants apply as an essential occupier.
Update: Heartland Boy subsequently took advantage of the ultra low interest-rate environment as a result of the Covid-19 pandemic. Do actively keep a lookout on the cheapest home mortgage package available on PropertyGuru Finance
I have used my OA for my property downpayment and have been using it for the monthly loan installments for the past 5 years which has resulted in a virtually dry OA.
Assuming that I am able to accumulate 50k of normal savings in what order of priority would you recommend ( or advise against ) the following steps:
1) Once my lock-in ends , I use the cash to make part payment of the loan to reduce my installment amount .
2) Once my lock-in ends , I use the cash to make part payment of the loan to reduce my loan tenure .
3) I do not make the partial payment but switch to using cash for monthly installments so the OA can grow.
4) Keep everything the same and perform a cash top up in an even split between my OA and SA account.
For No 1 & 2, does lock-in refer to a bank loan? Any prepayment penalty?
For 4, a cash top up to SA known as the RSTU scheme will lead to a tax reduction, so this is really beneficial if you are in a high tax bracket. However, it does nothing to your property mortgage.
Yes item 1 and 2 refers to a bank loan . I shall be eligible to recontract soon and so was wondering what would be the best option forward to make use of my savings that can benefit my mortgage, my CPF fund and potentially tax benefits too.
if you can invest better than the loan interest of 2.6%, it is ideal to get the longest loan tenure and pay the least downpayment possible. So why did you opt to wipe out your CPF OA?
Yes, that would have been advisable. If I am servicing this housing loan on my own, I would have done that. With a wife, the equation changes 😀
Hi Heartland Boy,
I have been a long time follower. If me and my wife is purchasing a property under an Owner Essential Occupier scheme, do you know if the Essential Occupier’s income will be taken into account to assess eligibility for HDB Loan? We want to fall under the income cap because of the high interest rate environment. Thanks!
I am not sure. I think its better to check with the HDB officer with your specific query.